What you need to know Financial Services Regulations

Regulatory Reforms around Capital Requirements

A look at evolving regulations for capital requirements and the business and technology implications for global financial services institutions Contents

1 Highlights 3

2 Introduction 4

3 current and Evolving Regulatory Reforms around capital Requirements 5

3.1 Meeting Capital Adequacy Requirements 5

3.2 Areas of Regulatory Reforms to Improve Capital Quality 6

3.3 New Basel Norms for Higher Global Minimum Capital Standards 7

4 Business Implications for Financial Services Institutions 9

4.1 The Impact of Regulatory Changes on Banks 9

4.2 How Financial Services Institutions Can Deal with a Tougher Regulatory Environment 10

4.3 Next Steps for the Financial Services Industry 10

5 the Path Forward: Imperatives for Financial Services Institutions 12

5.1 Key Focus Areas for Financial Services Institutions before Implementing Basel III Norms 12

5.2 Key Recommendations 13

References 15

2 the way we see it

1 Highlights

After the endorsement of new Basel III norms at the G20 summit in Seoul, it has become clear that regulatory reforms are largely complete except for the upcoming treatment of systemic institutions. Capital and funding are the key focus areas of Basel III as regulators believe that improving the quality of capital will drive banks to improve their underlying risk-management.

The impact of the new Basel III rules on the global financial sector is expected to be substantial.

In response to the new regulations, banks have already started building their capital and funding stocks, though financial services institutions face a major challenge to achieve compliance with the new rules and capital ratios. Basel III regulations will be implemented over a period of time (until 2019), making the technology implementation challenge much harder. Many banks have already started working in the direction of adopting new requirements before the stipulated timelines, in order to send positive signals to the market and the investors. The complexity of the implementation will depend on the level of financial services institutions preparedness for Basel II implementation and also on how they plan to build comprehensive risk-management systems. Institutions who are Basel II compliant will be at an advantage while implementing the solution over those who will have to start from scratch.

The key technology areas for financial services institutions to focus on while implementing a solution will be design, data quality, and reporting. The system framework should be robust, easily upgradable, and highly configurable. Maintaining data quality and consistency is the biggest challenge and requires industry-level effort.

New capital requirements and other regulations are expected to change the structure and dynamics of the financial services industry. It is believed that the tougher regulations, if implemented properly, will reduce the chances of another systemic failure in the long run but may adversely affect the profitability of the banking sector in the short-term. Financial institutions should redefine their business strategy in the wake of current and evolving regulatory environment, along with exploring new avenues for profit generation and long-term sustainability.

Regulatory Reforms around Capital Requirements 3 2 Introduction

The financial crisis exposed weaknesses in the global financial system. Chief among them was the web of interconnections across global financial institutions and investments, which resulted in a cascading effect that gained strength and toxicity. Key weaknesses revealed by the financial crisis include: ■ Lack of transparency ■ Noncompliance of accounting practices ■ Inadequate risk measurement and management process ■ Misaligned compensation and incentive policies ■ Lack of sufficient governance and supervision

Throughout 2008 and 2009, regulators around the world acted quickly to take measures to increase the strength of the overall financial system. Though these regulatory reforms are still evolving, regulators have attempted to fill the gaps that emerged during the crisis (especially regarding risk assessment and measurement), strengthen the capital base, adopt global standards for minimum liquidity, and enhance accounting standards to reduce systemic risks.

As regulations are expected to evolve to create a risk-aware financial system, the momentum for change is converging around six key regulatory themes.

Exhibit 1: Key Themes Driving Regulatory Reforms and Structural Changes across Global Financial Services Institutions

Capital

Global Cross-Border Regulation Low levels of capital held by institutions, Liquidity Management coupled with high levels of leverage served to multiply risk, were identified as some of Large, cross-border institutions pose the root causes of the financial crisis Financial-crisis highlighted inadequate special risks hence will be subject to liquidity buffers and poor liquidity risk increased scrutiny management within banks, resulting in a liquidity crisis Regulatory arbitrage due to non-uniform regulations is a risk to global financial systems stability Key Regulatory Investor and Consumer Protection Themes Accounting Standards and Investors have suffered significant losses Financial Regulations during financial crisis that was stimulated in large part due to flawed practices and Accounting standards prior to the financial structural weaknesses of the financial crisis did not reflect the true financial institutions position of financial services institutions Remuneration, Governance hence there is a continued push for a and Supervision harmonized set of accounting standards

The focus and link to risk should be improved, and supervisory structures are seen evolving to better detect both idiosyncratic and systemic risks

Source: Capgemini analysis, 2011

This paper reviews and summarizes the regulatory reforms emerging around Capital Requirements.

4 the way we see it

3 Current and Evolving Regulatory Reforms around Capital Requirements

3.1. Meeting Capital Adequacy Requirements The past couple of decades have seen both significant change and growth in the financial services sector across global markets. Many markets globally have experienced banking crises, which has led to failure of the financial system disrupting the overall economic activity.

The insecurity in credit markets that began in mid-2007 clearly pointed out The failure of regulators to numerous weaknesses in managing adequate capital by banks. Some of the major identify the inherent issues weaknesses of the global financial system that were exposed in the crisis are within the financial system discussed below. was the key reason why so 1 many financial institutions were Low core equity levels During the financial crisis it became clear that most banks were holding low levels caught completely off-guard. of core equity, meaning that in case of defaults they would fail to honor their debt. This was a big concern for creditors and especially for banks. Raising capital for their operations became difficult due to liquidity crunch.

Poor capital base quality It emerged post-crisis that the banks were not only facing problems due to low levels of capital, but there were issues around the quality, consistency, and transparency of their capital base.

Inadequate risk coverage Some financial institutions relied too much on risk models for risk-measurement, thus losing their perspective on the experience-based benefits of risk management. Also, the risk calculations were generally based on single parameter, for example Value at Risk (VaR) or Tier 1 ratio.

Very high leverage ratio Most banks had very high leverage ratios, making them “too big to fail” and posing systemic threat to the financial system. In addition to these weaknesses, there was a clear lack of expertise around risk and valuation methodologies, calculating transfer of funding costs and liquidity pricing.

1 Core equity consists of equity capital and declared reserves

Regulatory Reforms around Capital Requirements 5 “The top three things to get 3.2. Areas of Regulatory Reforms to Improve Capital Quality done,” U.S. Treasury Secretary In North America and Europe, regulators focused on the need for increased capital Tim Geithner told the New and liquidity buffers. While in Asia, the focus has largely been on risk management, York Times, “are capital, stress testing, and the need for risk and capital management to be aligned with a capital, and capital.” bank’s core strategy.

Source: Financial reform’s unfinished agenda, Clearly, the underlying theme of regulations across the globe is to ensure that banks The Washington Post, 06 Jul 2010. have sufficient capital reserves for paying their creditors in the case of a default. Regulators have also introduced a narrowly defined Common Tier 1 ratio2. The two key areas where regulators are focusing their efforts to strengthen banks’ capital base are common tier 1 capital and maximum leverage ratio.

Common Tier 1 Capital Regulator’s view Tier 1 capital as the key measure of a bank’s financial strength, which has made it the core focus area of Basel III regulations on capital requirements. As per the new Basel III norms, banks will be required to hold more Common Tier 1 capital will also high quality capital, though there will be a lengthy transition period in which to be reduced by unrealized gains implement these new changes. With an increase from the current ratio of 2%, and losses, putting an additional banks will be required to hold common equity at 4.5% of their total assets by 2015. burden on banks by partially Regulators have also increased the deduction around common Tier 1 capital, such offsetting capital-preserving as net-deferred taxes, minority interest, and other intangibles. Along with these accounting treatments. deductions, unrealized gains or losses will also be subtracted in the calculation of common Tier 1 capital.

Exhibit 2: Key Focus Areas for Regulators

Common Tier 1 Leverage Ratio Capital

Predominant form of Common Imposing maximum leverage Tier 1 capital will be common ratio, to make sure that banks shares and retained earnings do not become “too big to fail” The combination of a much “stronger definition of capital, Leverage ratio will relate higher minimum requirements Hybrid capital instruments Tier 1capital to the gross will no longer be eligible for balance sheet volume, and the introduction of new Common Tier 1 status, unless including off-balance sheet they satisfy strict criteria capital buffers will ensure items, at full credit conversion that banks are better able to withstand periods of economic Source: Capgemini analysis, 2011 and financial stress, therefore supporting economic growth ” Maximum Leverage Ratio Nout Wellink, Regulators have also imposed a maximum leverage ratio as they want to reduce Chairman of the Basel Committee on the risk of systemic threat to the financial system by controlling a bank’s size, Banking Supervision and President of so that it does not become “too big to fail”. Regulators realized that financial the Netherlands Bank institutions, which were the primary entity involved and affected by the crisis (such as investment banks and mortgage houses), had very high leverage ratios in Source: Group of Governors and Heads of Supervision announces higher global minimum comparison with traditional retail banks. capital standards, Bank for International Settlements, 12 Sep 2010

2 Common Tier 1 ratio is the ratio of a bank’s core equity capital to its total risk-weighted assets 6 the way we see it

3.3. New Basel Norms for Higher Global Minimum Capital Standards Basel III tier 1 capital levels are tougher and more arduous for banks than those of its predecessor (Basel II), especially when put together with other Basel III proposals for a leverage ratio and liquidity buffers.

While Basel II focused on improving bank’s risk-management, Basel III regulations seek to address the issues with proper capital and liquidity management. Regulators realized that the insufficient level of capital held by banks was one of the key reasons for the financial crisis and thus focused attention towards ensuring that banks hold sufficient capital in accordance to their risk exposure.

Basel III regulations on capital requirements focus on the following key areas.

Improve quality of core capital held by banks As per the Basel Committee of Banking Supervision, “The new regulatory norms will increase the minimum requirement for common equity (the highest form of loss absorbing capital) from the current 2% level3 to 4.5% after the application of stricter adjustments. This will be phased in by January 1, 2015. The Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4% to 6% over the same period”.

Exhibit 3: Difference between Basel II and Basel III Norms around the Capital Requirements of Banks

Basel II Basel III

Tier 1 Capital ■ Tier 1 Capital Raio=4% ■ Tier 1 Capital Ratio=6% ■ Core Tier 1 Capital Raio=2% ■ Core Tier 1 Capital Ratio (Commom Equity after deductions)=4.5%

Capital Conservation ■ There is no Capital ■ Banks will be required to hold a capital conservation buffer of 2.% to with Buffer Conservation Buffer stand future periods of stress brining the total common equity requirements to 7% ■ Capital Conservation Buffer of 2.5%, on top of Tier 1 capital, will be met with common equity, after the application of deductions

Countercyclical ■ There is no Countercyclical ■ A countercyclical buffer within a range of 0%-2.5% of common equity or Capital Buffer Capital Buffer other fully loss absorbing capital will be implemented according to national circumstances ■ Banks that have a capital ratio that is less than 2.5% will face restrictions on payouts of dividents, share buybacks and bonuses

Capital for ■ There is no Capital for ■ Equity surcharge, raning from 1%-2.5% of their assets, adjusted for risk, on Systemically Systemically Important Banks top of the Basel III global minimum of 7% Core Tier 1 Capital Important Banks only

Source: Basel III Compliance Professionals Association, 2010

Introduce a capital conservation buffer The capital conservation buffer above the minimum regulatory requirement is fixed at 2.5%. The conservation buffer ensures that banks will maintain minimum capital that can help absorb the losses by banks during times of financial and economic stress.

3 Before the application of regulatory adjustments Introduce a countercyclical buffer The Basel Committee on Banking Supervision states that, “A countercyclical buffer within a range of 0-2.5% of common equity (or other fully loss absorbing capital) will be implemented according to national circumstances”. A countercyclical buffer helps in shielding the banking sector from excessive aggregate credit growth. For Capital requirements are a given country, the countercyclical buffer will only come into effect when excess supplemented by a non-risk- credit growth is experienced which could pose a threat to the entire financial system due to risk build-up. based leverage ratio that will serve as a backstop to the risk- Set stricter regulations for systemically important banks based measures. Regulators are developing an integrated approach for systemically important financial institutions, which is expected to include capital surcharges, contingent capital, and bail-in debt. As per the Basel Committee on Banking Supervision, “The Global Systemically Important Financial Institutions would face an equity surcharge ranging from 1-2.5% of their assets, adjusted for risk, on top of the Basel III global minimum of 7% core Tier 1 capital”. The new regulations will help in measurements that will be used to determine bank’s surcharge, including balance sheet size, cross-border claims and liabilities, dependence on wholesale funding, and lending to other financial institutions.

Introduce leverage ratio of 3% Regulators have taken steps to test a bank’s tier 1 leverage ratio of 3%, which will ensure that banks lend no more than 33 times their capital, significantly lower than what some banks were lending before the financial crisis. Though these new norms are to be introduced in 2018, banks will need to disclose their leverage ratios from 2015 onwards.

The timelines for the implementation of new Basel III norms will start in 2013 and will go until 2019.

Exhibit 4: Phase-in Arrangements for Basel III Capital Requirements

2013 2014 2015 2016 2017 2018 2019

Min. Core Tier 1 Capital Ratio (% of RWA) 3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5%

Capital Conservation Buffer (% of RWA) - - - 0.625% 1.25% 1.875% 2.5%

Min. Core Tier 1 plus Capital Conservation 3.5% 4.0% 4.5% 5.125% 5.75% 6.375% 7.0% Buffer (% of RWA)

Phase-in of deductions from Core Tier 1 - 20% 40% 60% 80% 100% 100%

Min. Tier 1 Capital (% of RWA) 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0%

Min. Total Capital (% of RWA) 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

Min. Total Capital plus Capital Conservation 8.0% 8.0% 8.0% 8.625% 9.125% 9.875% 10.5% Buffer (% of RWA)

Countercyclical Buffer Range between 0-2.5% (common equity or other fully loss absorbing capital)

Capital instruments that no longer qualify as Phased out over 10 year horizon beginning 2013 (reduction of 10% per year) Non-Core tier 1 Capital or Tier 2 Capital

Source: Bank for International Settlements

8 the way we see it

4 Business Implications for Financial Services Institutions

4.1. The Impact of Regulatory Changes on Banks In comparison with the pre-crisis situation, Basel III regulations on capital requirements focus on improving both the quality and quantity of the capital held by the banks. For regulators, the key challenge will be to ensure that Basel III regulations achieve a substantial reduction in systemic risk, while not reducing the banking industry’s profitability significantly, as the new regulations are expected to absorb a significant amount of today’s Tier 1 capital. Also, the stricter requirements on trading book exposures will have significant impact on trading activities, especially in the case of large investment banks.

This more-complex New capital requirements will have a definite impact on the financial services understanding of risks and industry’s structure and the way it operates. The industry may undergo the emerging vulnerabilities is likely following structural changes in order to comply with tighter regulations while to help banks to proactively mitigating a significant reduction in its profit margins: identify potential disconnects Consolidation or nationalization of banks between risk appetite and In order to comply with new capital requirements, banks will be required to raise a business decisions. significant amount of capital. Banks can raise this capital from the capital markets, but it is a challenge for them to do so as investors are still unsure about their ability to provide solid returns. Therefore, banks may face a period of significant consolidation or even nationalization of banks (such as ABN Amro, Santander, and Fortis). Aside from meeting capital requirements, consolidation may occur due to the negative impact of separating deposit and investment businesses of banks on their efficiency.

Slowing the pace of recovery The new regulations will force banks to reduce their leverage ratios and reduce their risk exposure. This will in effect result in a higher cost of financing and may reduce a bank’s lending ability to its customers. Such a scenario could result in a fall in economic activity, enhancing the risk of a slow and volatile global economic recovery. Europe is expected to be affected more than the US, as European banks finance the majority share of their national and regional economic activities.

Change in product landscape Financial markets significantly changed as a result of the financial crisis. While certain products will be revived, others probably will not be—at least not in their prior forms. As the financial reform framework is further defined and, more importantly, recalibrated, the attractiveness of certain products and businesses is likely to change further. For example. in Europe, Solvency II legislation has proposed 39% capital charge on equities, 29% on real-estate investments, but no capital charge on government bonds.

Impact will depend on individual business models The impact of new regulatory reforms on financial services institutions will vary depending on their business model and operations. The top management of bank must understand and analyze the potential impact of new reforms on their business model and devise strategies to minimize its impact.

Regulatory Reforms around Capital Requirements 9 4.2. How Financial Services Institutions Can Deal with a Tougher Regulatory Environment The new regulations on liquidity and capital are expected to put pressure on banks that will have to raise capital either from debt or equity markets.

In the short-term, to comply with the new capital requirements, firms can divert capital from other sources to increase their core Tier 1 capital. Banks will also have to identify the business areas where they do not see much growth and potentially exit from them to raise liquidity. The other measures that banks can take to raise capital are to convert their hybrid instruments to Tier 1 capital or to improve the efficiency of their risk-weighted assets.

The regulations will deeply impact capital market participants such as investment banks and proprietary traders, and this is expected to lead to a reduction in trading volumes of certain complex securities. The impact of increased capital costs will also be felt by other financial market players, which can partly be offset by changing the business structure and aligning it to the “new normal”. As the costs of capital and funding increases due to new regulations, the banking industry may become much more competitive to attract this capital and thereby put further pressure on a bank’s balance sheet.

4.3. Next Steps for the Financial Services Industry Despite uncertainty about the exact impact of new regulations on the global financial industry, there are some areas which make sense for banks to focus on. Over the medium term, banks are expected to take the following key steps.

Identify and focus on key business areas Many banks will have to identify key focus areas in their existing businesses and reallocate capital to their strategically important businesses. This will help financial services institutions improve their profitability as they will be operating in areas of their core competency.

Simplify business operations Banks across the globe were operating in a complex and intertwined market structure where the failure of one bank led to the failure of another due to the contagion effect. To comply with tighter regulations on capital and liquidity, and to reduce systemic risks, banks should work on reducing their business complexity. Reducing their exposure to complex and hybrid securities will also help banks release tied-up capital, thereby helping to improve their capital adequacy ratios as mandated by Basel III.

10 the way we see it

Develop institution-wide risk culture One of the key suggestions of the Basel committee on risk-management was to have internal and customized risk mitigation systems. Regulators believe that different banks have very different risk profiles due to their individual organizational structures and business mix. Hence, a one-size-fits-all approach to risk management is not appropriate and each bank requires a customized risk mitigation approach.

In addition, Basel III strongly recommends banks to develop an institution-wide risk culture, essentially meaning that risk-management should not be limited to risk specialists but should be the responsibility of each member of the organization. Therefore, banks have an opportunity to make efforts in educating their employees around their responsibilities related to effective risk-management.

Invest in technology and data management systems Maintaining data accuracy, transparency, and consistency across the organization will be the key challenge for financial institutions to mitigate operational and systemic risks. The Basel committee has realized the challenge financial services industry faces today around data quality and has thus recommended the development of data standards which will be consistent for firms globally. Regulators have also set stringent reporting standards which now require banks to provide agencies with detailed reports based on accurate data. This requires banks to now comprehensively analyze their current data and reporting systems, and do a cost-benefit analysis in order to identify the best possible approach for revamping their data management systems.

Banks can either outsource or build their data management systems in-house. Both approaches have their own pros and cons, and it will depend on the financial institution to decide which approach best aligns with its business strategy.

Regulatory Reforms around Capital Requirements 11 5 The Path Forward: Imperatives for Financial Services Institutions

Banks have now started preparing for the implementation of risk and data management solutions, as most of the new regulations have either been formalized or are in the process of getting finalized by the agencies. The key question that financial institutions should ask themselves is whether their current technology infrastructure is capable enough to cope with the new requirements or they will The technology investment have to build it from scratch? required to comply with Basel III will largely depend on the level 5.1. Key Focus Areas for Financial Services Institutions before of investment already made to Implementing Basel III Norms meet Basel II regulations. Generally, Basel III regulations are an extension to the current Basel II norms, but newly introduced rules are expected to have significant implications on the business operations and the balance sheets of financial services institutions. The key areas If a bank has a fully functioning where banks should focus their attention are discussed below. and auditable risk management and measurement system, it can Gap analysis make incremental investments The first step that a bank should take is to analyze its current IT systems and define to comply with the solvency gaps between the current state and new requirements. Banks who have already part of Basel III. However, to implemented Basel II requirements will be at an advantage over peers that have not. meet the liquidity element of Basel II compliant banks will find it easier to adopt and implement the new Basel III Basel III, the investment could norms such at a leverage ratio and new capital and liquidity standards. be much higher. While certain key elements of Basel III regulations are measured over a period of time (such as liquidity ratios) and will require a new approach requiring a holistic gap analysis which will help banks make correct estimates of efforts and investments required earlier in the process.

Complexity of the task at hand During Basel II implementation, banks and regulators realized that being compliant with the new large-scale regulations will be complex and time-consuming. Although implementing the new norms will be spread over a decade to provide an adjustment period to the banks, they will still be under pressure to comply on-time or ahead of the stipulated timelines.

In addition to cultural and business challenges, banks have complications around inflexible legacy systems or platforms which were built not in-line with global data and reporting standards.

Extendible and upgradable new platform Basel III technology infrastructure should be capable of change and extension. Banks need the flexibility to meet current requirements as well as future needs. Firms have to keep in mind while designing their systems that the regulatory reforms continue to evolve as changes and volatility take place across the global markets.

12 the way we see it

Accurate data management The steepest learning curve for banks implementing Basel II was around how to manage data to ensure high standards of data quality and accuracy. Banks have realized the importance of accurate data not only for mitigating operational risk, but also the important role data plays in effective and sound decision making based on Under Basel III, the board and data analysis. “senior managers have very specific roles with regards to Banks should have a complete understanding of where particular data is being used risk and risk appetite, where the in the organization, the number of users, how the data is sourced and distributed board or governing body is there (internally or externally), and how the data is cleaned and stored. Regulators have to set the risk appetite and the also pressed upon the need for having accurate data management systems and senior managers are there to comprehensive data governing policies for firms. manage the firm within that. 5.2. Key Recommendations The impact of new capital requirements on a financial institution’s technology But a bank can only do that on a infrastructure can be assessed as moderate. If banks already have Basel II firm-wide basis if it has a single compliant systems which are scalable, the technological impact will be minimal. source of truth, otherwise it For example, the new regulatory norms for risk-weighted-asset calculation (which faces a heavy data reconciliation is an extension of the Basel II requirements) will just require an incremental process” upgrade to the existing system. Selwyn Blair-Ford, However, banks that are not Basel II compliant will have to start afresh and Head of Global Regulatory Policy, are expected to experience a significant technological impact of the new FRSGlobal Basel III regulations.

Source: Banks seek technology answers for The global financial industry is undergoing some significant structural changes and Basel III - www.risk.net, 02 Mar 2011 this puts technology at the forefront of areas which need considerable improvement including: Manage data centrally The Basel committee has categorically advised financial institutions to follow global data management standards. A bank’s first step in this direction is to have a centralized data repository that is responsible for ensuring accuracy, completeness, and reliability of organization-wide data.

The centralized data repository will collect, clean, consolidate, coordinate, and distribute data to internal or external users. In addition, such a repository makes it easier to manage data and thus ensures that faulty data is not used in calculating risk exposures, along with ensuring accurate reporting to the regulators.

Regulatory Reforms around Capital Requirements 13 Develop flexible reporting tools Regulators have set stringent reporting standards which financial institutions need to now comply. For example, in Europe, regulators have introduced Common and Financial Reporting Standards for capital adequacy and financial reporting respectively. This makes it very important for banks to have an accurate and comprehensive reporting system. Also, reporting tools need to be flexible in order to capture any changes in regulations and standards in future.

Build an internal rating system for capturing credit and market risk The Basel committee has advised banks to follow an internal rating-based approach which helps in identifying key risk areas and thereby reducing the risk-weighted assets of banks. With regulators pushing for an internal rating system, banks that do not already have their own credit rating system are looking to invest in this area. Before building their internal rating system, banks need to keep in mind that these systems should be flexible and comprehensive.

Enhance trading systems Basel III regulations also stressed upon having standard products and routing over- the-counter (OTC) trades through central clearing houses. This new development will lead to an increase in the trading volumes due to the large scope of the OTC market.

Current trading systems are already proving to be sub-optimal in handling high trading volumes, which have resulted due to the popularity of high frequency and algorithmic trading (trade size is reduced, which leads to increase of trade volumes). With the proposed move of shifting over-the-counter products through central clearing, current trading systems are not equipped to handle the increase in trading volume. Therefore exchanges, clearing houses, and dealers need to upgrade their systems to handle high volumes.

Most banks have or are in the process of building platforms to comply with new Basel III requirements, but many financial services institutions have only just begun responding to the new regulations.

Many US banks are facing the challenge as they did not adopt Basel II norms and will now have to move directly to Basel III. Financial services institutions which were recently involved in mergers or acquisitions will also have to incorporate attributes of the new entities into their systems to become Basel III compliant.

These financial services institutions are now looking for more robust, upgradable and easily configurable systems, not only for compliance purposes but also from the strategic standpoint.

14 the way we see it

References

1. Group of Governors and Heads of Supervision announces higher global minimum capital standards, Bank for International Settlements, 12 Sep 2010. http://www. bis.org/press/p100912.htm

2. The G20 leaders officially endorse the Basel III framework, Basel III Compliance Professionals Association (BIIICPA), 12 Nov 2010. http://www.basel-iii-accord. com/

3. Basel III requirements and their bottom-line impact on IT and business integration by Michael Nace, Integrella, 01 Nov 2010. http://portal.integrella.com/basel-iii- requirements-and-business-integration

4. Banks seek technology answers for Basel III by Clive Davidson, Risk magazine, 02 Mar 2011. http://www.risk.net/risk-magazine/feature/2028815/banks-seek- technology-answers-basel-iii/

5. Basel III and its implications for the world financial system by Pascal Gautheron, Jordan Griffiths and Christopher Loh, Asian Banking and Finance, 03 Dec 2010. http://asianbankingandfinance.net/banking-technology/commentary/basel-iii-and- its-implications-world-banking-system

6. FSB proposes capital surcharges for banks by Brooke Masters, Financial Times, 19 Jul 2011. http://www.ft.com/intl/cms/s/0/7267e534-b1f0-11e0-a06c- 00144feabdc0.html#axzz1XLt5ZPxH

7. What Basel III means for banks IT by Jamuna Ravi, Finextra, 14 Feb 2011. http://www.finextra.com/community/fullblog.aspx?blogid=4988

Regulatory Reforms around Capital Requirements 15 What you need to know Financial Services Regulations

This series from Capgemini Financial Services provides information, research, and analysis on key regulatory and compliance topics for banks, capital markets firms, and insurers to help understand the impact of ever-changing government regulations across the globe. The series is written by our Strategic Analysis Group. About the Authors Topics are divided into six broad themes: Rajendra Thakur is a Senior Consultant in Capgemini’s Strategic Analysis Group within the Global Financial Services Market ■ Accounting Standards Intelligence team. He has four years of experience in the banking and ■ Capital Requirements capital markets industry with expertise in fixed income. ■ Cross-border Regulations Ashish Kanchan is a Lead Consultant in the Strategic Analysis Group ■ for Capgemini Financial Services. He has over 10 years of experience Remuneration, Governance, and Supervision in the banking and capital markets industry with expertise in private ■ Investor and Consumer Protection banking, wealth management, and asset management. ■ Liquidity Management The authors would like to thank William Sullivan, David Wilson, and Paul Pullinger for their overall leadership of this publication. Given the volatile nature of government regulations, this series will provide a refreshed For more information, visit www.capgemini.com/risk or look at how these six regulatory themes continue e-mail [email protected]. to evolve and impact the financial services industry. The latest publications are available at www.capgemini.com/financialservices.

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